Gaming with investors and The Value Web in Davos

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The Value Web has co-designed the Investors Heatmap session in Davos for years. Each year we’ve ramped up the complexity of the tasks and this year was no exception. We decided to add the gaming component of poker this year.

Tongue in cheek when you consider the track record of the past few years? You decide.

The game is well-described in this BBC article by Tim Weber, who was part of a team. It was enlightening to hear his insights on the game that I designed. I learned a lot from his reflections. I also, by chance, sat next to another participant at a dinner who went on and on about the importance of the outcomes of this game and how we should be more methodological about capturing and sharing them. Love happy participants!

The global economy is in turmoil. Exchange rates are swinging wildly. Politicians have to organise bailouts galore. Interest rates are absurdly low – or absurdly high if you find yourself out of favour with the financial markets.

So what would you do with $1bn (£640m) that you’re given to invest?

That’s the premise of a fascinating workshop called Investment Heatmap, run every year at the World Economic Forum in Davos. It’s an opportunity for top investment managers to network, discuss strategy, try their skill and have fun.

More importantly, it gives some insight into how top investors think, where they would put their money – although you’d probably need some $10m or $20m to buy your way into these funds.

The task

Walking into the room where the workshop is held is not for the faint of heart. Assembled before you are women and men who between them manage hundreds of billions of dollars. If there’s one thing that’s not lacking, it’s confidence and self-belief.

Under Davos rules, I can’t name names, but think of some of the biggest names in the world of private equity, and investment and hedge funds.

And every year, the organisers ratchet up the difficulty of the task to solve.

This time, we were given at random

a region where to invest,

two industries to choose from where we could put our money,

assigned a fund type (private equity, hedge fund etc), and

given a choice what kind of top talent to recruit to run the fund.

Then we had 20 minutes to develop an investment strategy and work out a pitch to persuade investors to give us their money.

Finally, our six groups were given $1bn to “invest” in the best “fund” that had just pitched at the event.

By the way, not everybody in the outside world will chuckle with appreciation that the workshop had been fitted out like a casino, replete with images of slot machines and poker cards.

Meet the India Future Fund

Remember that, for many in the room, $1bn is not a lot of money.

“With Russia you know there’s corruption at the top, so that’s more like a tax. In India there’s corruption at every level”

That’s especially true if, like our fund, the luck of the draw turns you into a private equity firm wanting to invest in India’s infrastructure (we discarded the option to invest in mining straight away; there would have been just too much hassle with environmentalists and bureaucrats).

Our team leader, one of the most respected veterans of the US private equity industry, cut to the chase: “We don’t need a strategy, we need talent” and rushed to the board where we could select the kind of person we’d want to run our fund. He opted for “ex-chief executive” and “corporate superstar executive”.

“We’ll surround the two with MBAs and a few veterans from our firm,” he quipped.

And so we went to work. It was fascinating to join a group of top-end investment professionals at work. Expertise in our group of 10 was identified, discussions were short and sharp, pros and cons were clearly laid out, there was little hesitation making decisions.

And so we launched the India Future Fund, specialising in infrastructure investments (providing high-voltage power transmission), and led by an ex-CEO as chairman, ideally a well-known Indian industrialist who would be able to cut through bureaucracy, understand the market and appease all sides of India’s lively political spectrum.

His sidekick would be an experienced industry executive, maybe poached from a company like ABB.

We agreed that doing business in India would not be easy, but were confident that our Indian ex-CEO would resolve any problems.

We promised our investors not a crazy rate of return – just 18-20% a year – but returns would be steady and arrive in the near-term.

If this were real life, I’d put all my money in our fund, said our private-equity-veteran team leader. But there were five other teams to compete with.

Brazilian Growth Fund

This team hailed Brazil as “the best of the BRICs” with huge growth potential. This private equity fund decided to bet on Brazil’s rapidly growing middle class, investing heavily in the food and beverage sector, as well as sports.

“Brazil’s middle class is exploding,” argued the team, and said it would recruit an ex-president who’d proven to be an excellent deal maker (no prizes for guessing who they meant).

Beluga Ventures

Would you fancy being a venture capitalist in Russia? This team tried to have a go at it.

For starters they solved any political crisis Russia might have, and lured former (and future?) President Vladmir Putin to lead their fund (he’ll know how to get things done, they said with a wink and a hint at heavy-handed tactics).

A well-known Russian industrialist rounded off the talent pool.

Internet usage was growing rapidly in Russia, they said, so a hefty share of the billion would go into web ventures.

And as the wealth of Russia’s oligarchs trickles down, the team predicted a rising demand for financial services and healthcare services. They painted visions of chains of dental clinics, hospitals and cosmetic surgeries.

But a cruel jibe from one of the competing fund managers deflated their balloon: “Will the clinics treat bullet wounds as well?”

The Souk Fund

The Middle East and Northern Africa (MENA) is a tricky region. Comparatively small, but in parts very rich, it requires a good strategy to crack.

The team called itself the Souk Fund, after the Arab word for market place, and as the name suggests the team planned to bet on the retail sector.

The money would got into chains of electronics and mobile phone stores, with a sideline in ecommerce.

The key, though, would be talent and they resolved to poach the boss of Goldman Sachs in Dubai, who would bring along his friend, the MENA chairman of consulting firm McKinsey to run the business.

This fund were “strategy consultants”, planning to invest heavily in young companies well beyond the stage of “seed investment”, with the hope of selling them on within three to five years.

Their ex-Goldman man would have the experience to bring growing companies to the stock market.

“This is an exit-driven fund,” they said, listing top banks who had lined up to take their charges to the stock market.

The Ascending Dragon Fund

No investment discussion is complete without at least considering China.

This was a “global macro hedge fund”, that would keep plenty of money on the side “for liquidity and hedging, which is important in these times” and once again bet on the rapid growth of the country’s middle class.

Goldman and McKinsey people are clearly in high demand, because this team was also determined to find its talent within these companies.

They planned to put about 80% of their money in securities of public firms, and leave the rest “liquid” for some light macro hedging.

The MacMe Fund

Finally, we had a US focused team, that was keen on riding the wave of the current social media boom.

It would invest $100m to build up a website that would be a social network for professionals, and they claimed – to howls of laughter – to have recruited no less than Facebook founder Mark Zuckerberg to lead their team.

However, this so-called “macro” hedge fund also claimed to have a young superstar trader who would have free reign with the remaining $900m to generate a great rate of return.

Choosing the winner

We were six teams, we had six investment strategies to pick from, and in the second phase each team had $1bn to distribute among the funds. There was just one rule: you could not invest in your own fund.

It didn’t take the teams long to allocate the money.

During the countdown we also discussed the strengths and weaknesses of each fund’s strategy.

Poor Mark Zuckerberg: MacMe came bottom of the pile, attracting just $100m. The reasons were obvious. Social network MacMe would have to face an entrenched competitor, LinkedIn.

More importantly, though, the rest of the money was in the hands of a single trader, and that was just too high a concentration of risk in these difficult economic times.

And spare a thought for the Russian fund. It received a mere $600m – and that’s only because the Brazil team had injected $400m.

“Did you invest in the weakest proposition to hurt your rivals?” asked the workshop’s official investment strategy adviser – and got knowing chuckles from the Brazil team in response.

So why did so few dare to invest? “I’m worried about getting my money out,” said one. “The guys in charge after Putin are sure not to like him,” ventured another.

Next up was the Chinese fund, which got $800m. Why so little money? Surely, China is a one-way bet?

Well, it’s all about pitch and strategy, and the heavy hitters in the room worried about China’s bubbly property sector, increasing regulation – and the fund’s reliance on public securities.

“This fund is just short on execution, and they have to fire their head of marketing,” said an investor.

India has infrastructure needs of $3tn, said a man who runs an India-focused fund in real life, “it’s a very safe bet”.

Others were not so sure. “India is a very capricious environment,” one said. “With Russia you know there’s corruption at the top, so that’s more like a tax. In India there’s corruption at every level.”

Another investor had even harsher words for India: “The Indian government has just condemned thousands of children to die, because they refused to liberalise the food market. As a result, things will continue as before, with 40% of India’s food going to waste in an inefficient supply chain.”

The winner

That left Brazil the runaway winner, attracting a massive $2.3bn investment.

Still, many in the room were left feeling queasy.

“This is not the Brazilian Growth Fund,” said one, “it’s the ‘Not China, not Russia, not India, not LinkedIn, Not Middle East Fund’.”

Another urged the team running the fund not to invest in food manufacturing. “If you make stuff, it will be difficult to make money. If you move it or market it, you’ll be fine.”

If you add up the numbers, you’ll notice that $600m were left on the table – to hedge our respective investment strategies. We all had been mandated to put at least $100m into a hedge, but there clearly was no appetite to go beyond the minimum requirement.

Brazil may have been the winner, for some reason there appeared to be a lack of enthusiasm for BRIC countries. Maybe they were spooked by the uncertainty that’s haunting even these high-growth countries.

One would hope they feel more certain when they put real money on the table.